$A treads water as equity markets remain flat

The lull between the end of the fiscal cliff drama and the resumption of war in Washington over the debt ceiling has left the Australian dollar treading water.

The currency was trading at $US1.047 on Monday as the local sharemarket and Asian markets hovered around their opening values in the absence of fresh leads from the US or Europe.

The US debt ceiling debate needs to be resolved by the February deadline.
Commonwealth Bank
economists tip the Aussie dollar will be high for a time longer than that. They argue the $A is overvalued by 5 to 10 per cent, using traditional metrics like commodity prices, but that flows of central bank reserves are more important in determining currency values now.

CBA economists also blame the loose money policies in the rest of the developed world, which they describe as an “insidious influence". The US has been running quantitative easing policies for several years, as the Australian dollar has stayed stubbornly strong. “A stronger AUD is a natural outlet for weaker currencies elsewhere," they argue.

CBA forecasts the local dollar to remain at $US1.04, and to weaken against the euro, from €82¢ to €79¢ in a year’s time.

Domestically, currency traders will look to trade balance data on Tuesday and Wednesday’s release of November retail trade figures for possible movement in the local currency.

Strong results from retail sales in November will bolster hopes for the economy and should diminish expectations of interest rate cuts. Markets are currently pricing in a 40 per cent chance of a 25 basis point rate cut in February.